Islamic finance is a complex sector, but this nascent market holds huge potential down to sheer numbers of underserved citizens.
In the family of global finance, the sharia-compliant sector is an adolescent. The ongoing case of Emirati energy company Dana Gas, which is contesting the legality of its own sukuk, is one example of the growing pains it faces. Fractious arguments between liberal and conservative jurisdictions over the compliance of certain products and services is another. This is the kind of rough-and-tumble growth spurt that the global market is now enduring; but it is important to remember that it will not last forever.
With the industry’s total assets at about $1.5bn, according to The Banker’s Top Islamic Finance Institutions ranking, it would be all too easy to dismiss a market of this size, and one that is facing pressing challenges to its future growth.
To do so would be a mistake. A new generation of leaders are driving the global market’s standardisation and integration. Institutions that boast a mix of international sharia scholars, such as the International Islamic Liquidity Management Corporation, for instance, are finding new ways to foster cross-border co-operation and tackle the industry’s challenges head on.
More importantly, Islamic finance has demographics on its side. To date, the market has flourished in Malaysia and the Gulf Co-operation Council region. But it has not even scratched the surface of countries such as Indonesia, Nigeria and Pakistan.
These populous – and growing – markets represent the industry’s future. Most of these countries, and their frontier market peers, are underserved by existing financial services firms. Their young, energetic and ambitious citizens are ripe for financial inclusion initiatives that could be offered under the umbrella of ethical finance.
Engaging this youth boom will positively impact the bottom lines of most Islamic finance institutions, while there is also likely to be a blowback influence on the industry. Tech-savvy youngsters in Jakarta, Lahore and Lagos are likely to drive revolutionary new approaches to sharia-compliant financial services and products.
Fintech innovation, above all, will push the industry forward in ways that contemporary leaders can hardly imagine, as technology is combined with sharia compliance. This will open up the market to new ways of thinking and an entirely new way of generating cross-border consensus. For Islamic finance, the best is yet to come.
